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It's now been a month since the Fed launched its QE3 operation, which involves purchasing $40 billion of agency mortgage-backed securities per month with the aim of boosting employment and housing. Since then, the unemployment rate has dipped below 8% for the first time in nearly four years, but that was really a case of a fortuitously timed monthly economic indicator. Now, the early QE3 effects on the other target market -- housing -- are starting to come into sharper focus.

Data for September housing starts and new homes sales won't be released until later in October, but those measures are tough to ascribe to last month's monetary policy anyway. Looking instead at mortgage rates, the average 30-year fixed-rate mortgage, which stood at 3.55% immediately pre-QE3, has since fallen to an all-time low 3.36% before ratcheting up a bit to 3.39% last week, according to Freddie Mac's weekly survey numbers.

Bill Irving, who heads mortgage investments at Fidelity, says the Fed's actions have so far benefited mortgage bondholders more than homeowners, with the Fed now buying about three-fifths of the gross monthly supply of agency mortgage bonds, which are backed by mortgages guaranteed by Fannie Mae and Freddie Mac. Those agency mortgage bonds have been bid up post-QE3 to the point where most fixed-income portfolio managers think they generally look too rich. Irving says the agency market also looks like it's broadly underestimating the potential for accelerated mortgage prepayments, which hurt bondholders as higher-coupon mortgages get called and replaced by lower-coupon ones.

The effect of such prepayments has already been seen in the form of squeezed interest margins for mortgage real-estate investment trusts. Shares in
Annaly Capital Managementnly 0.2403846153846154%Annaly Capital Management Inc.U.S.: NYSEUSD10.425
0.0250.2403846153846154%
/Date(1481302378515-0600)/
Volume (Delayed 15m)
:
702368
P/E Ratio
94.63636363636364Market Cap
10596247560.5507
Dividend Yield
10.149087415946205% Rev. per Employee
12737200More quote details and news »nlyinYour ValueYour ChangeShort position
(NLY), a big name in the agency REIT market, were down to $16.04 on Friday from a 2011 high of $17.75 on Sept. 12, the day before the Fed announced QE3. Similarly, shares in
American Capital Agency Corp.agnc 0.21574973031283712%AGNC Investment Corp.U.S.: NasdaqUSD18.58
0.040.21574973031283712%
/Date(1481302344311-0600)/
Volume (Delayed 15m)
:
633417
P/E Ratio
40.33695652173913Market Cap
6137592957.5006
Dividend Yield
11.6410670978173% Rev. per Employee
260667000More quote details and news »agncinYour ValueYour ChangeShort position
(AGNC) peaked at $36.68 on Sept. 17 and have fallen to $32.59 as of Friday.

JPMorgan chief Jamie Dimon said Friday that he thinks the housing market "has turned the corner" and that he's encouraged that credit trends keep improving, albeit modestly. But he also enumerated a variety of mortgage-market obstacles that remain, including elevated levels of charge-offs and high default-related expenses.

Fidelity's Irving sees the Fed's agency bond-buying program continuing through at least the third quarter of 2013. As long as interest rates remain stable, Irving says, mortgage rates could conceivably even fall below 3%, aided by the Fed's continuing purchases of lower-coupon mortgage securities, and that could fuel further refinancings.

While all the Fed buying has made the agency MBS market look rich, nonagency mortgage bonds now offer better comparable value to investors. If you're still inclined to shop within the agency MBS market, Irving says bonds backed by Freddie Mac tend to be less liquid than those backed by Fannie Mae and consequently trade at a discount.

Treasuries gained modestly last week but held tight within their post-QE3, pre-fiscal cliff trading band. Ten-year note yields fell to 1.661% Friday from 1.736% a week earlier, while yields on 30-year bonds dropped to 2.833% from 2.967%